Monthly Archives: September 2013

What are the different types of life insurance policies?

What are the different types of life insurance policies?

If you are considering life insurance, you should know what are the different types of life insurance policies available to you. Here’s a brief description of such policies:

(1) Whole life Policy:

On buying this policy, you need to keep paying premiums for as long as you are alive and the amount assured is paid only after your death. This policy, also called ordinary life policy, carries the minimum payable premium. This is an ideal policy when you want to extend financial assistance to your family after your death or when you want to leave funds for any charitable organization or make arrangements for payment of estate duty.

(2) Limited payment life policy:

One drawback of the whole life policy is that assured person needs to pay premiums even in his old age, on getting retired. Limited payment life policy eliminates that drawback by allowing the assured to pay premiums for specific number of years or till their premature death. In this case the sum assured is paid only after the assured dies. The amount comes handy for the family of the deceased.

(3) Endowment policy:

This remains valid only up to a certain age or a limited number of years. The sum assured falls due for payment when the assured attains a specified age or at the end of a specified number of years, called endowment period or on the death of the assured, whichever takes place first. Premium needs to be paid till the validity of the policy or its maturity. This policy demands a slightly higher premium than the whole life policy.  Consumers prefer this policy for the double benefit of family and pension it offers for old age.

(4) Double endowment policy:

With such a policy, the insurer promises to pay double the sum assured to the insured if he outlives the maturity date of the policy.  It’s an appropriate policy for physically disabled people who can’t be covered by other kinds of policies at the usual rates. Premiums have to be paid till expiry of the term or till death before it gets expired.

(5) Joint Life Policy:

Such a policy would cover the risk of life for two people, usually business partners, though under special circumstances the policy may include the lives of wife and husband. The sum assured is payable at the end of the chosen period or when either of the two insured people dies before the expiry of the policy.

(6) Policies with or without profit:

Policies with profit allow the policy holder to share a part of the profits of the company that is paid via bonus, which gets added to the sum assured but paid when the policy gets matured. In case of policies without profit no profit is shared. Obviously, the premium for former kind of polices is more that the latter kind.

(7) Convertible whole life policy:

Of the many different types of life insurance policies, this policy has a unique feature.  The benefit of this policy is that in the beginning it offers utmost insurance protection at the least expense and includes a flexible contract that allows the policy to be modified to an endowment insurance policy after completion of five years from the date of starting.

(8) Convertible term assurance policy:

This policy is designed to help consumers whose financial position doesn’t permit them to pay hefty premiums towards a whole life or endowment insurance policy in the beginning but expect to make larger contributions after a couple of years.  An outstanding advantage of this policy is that the consumer gets sufficient time for choosing the most suitable plan as per their future requirements.

(9) Fixed term (marriage) Endowment policy & education annuity policy:

This policy aptly takes care of the expenses of education or marriage of children. Premiums are to be paid for the chosen period or till premature death. Benefits are paid for the chosen term or till premature death. The same are paid only at the end of the term. For marriages, the amount is paid via a lump sum but in case of education annuity, the same is paid twice a year through equal installments for duration of five years.

(10) Annuities:

This kind of policy enables the assured to receive insured amount through monthly or yearly installments after having reached a specific age. The assured has the option of paying premiums regularly for a defined period of time or pay a lump sum amount towards that in the very beginning. Such policies are helpful when you want to have a regular income for yourself or your dependents.

(11) Sinking fund policy:

This type of policy is helpful when you want to have provision for paying any liability or having a substitute for an asset.

(12) Multipurpose policy:

It answers many requirements of insurance for the assured person. For instance it provides funds for his old age, his family or for education and marriage of his children or providing initial funds for their life.  It offers highest protection to the recipients in case of premature death of the assured as it offers:

i) Steady monthly income for the unexpired term

ii) Extra monthly income for two years from the date of death;

iii) Part payment of the sum assured on death

iv) Assured payment of the rest of the assured sum at the end of the chosen period

On maturity of the policy, the assured can get the assured amount in cash or by way of monthly pension or an enhanced amount payable at death. Premiums need to be paid for the chosen term or till premature death, whichever is earlier.

What Type of Life Insurance Do I Need?

Question:- What Type of Life Insurance Do I Need?

Answer:- LIMRA, an international consulting and research institution for financial and insurance industry, reports that as on 2010, nearly eleven million US families with children below eighteen years of age did not have any insurance coverage! On the whole, less than fifty percent US families had personal life insurance, meaning that in the event of the breadwinner dying prematurely, the dependents had no way to paying their  bills and would virtually be pushed to poverty.

That thought should prompt many to opt for life insurance cover but the variety of insurance products is so large that one is often unable to decide what type of life insurance do I need?

A majority of people would start considering having a life insurance cover on getting married and starting a family, though in fact, it is a lot more beneficial to buy life insurance policy at a younger age. This fact is highlighted by USAA Life Insurance, reporting that there is an increase in the number of singles buying life insurance covers, though the overall sales have dropped.

Unmarried young adults require sufficient funds for paying their end-of-life expenses, lest their parents should be required to clear their debts. Unmarried policyholders, providing financial or care support to their parents would also like their policies to fulfill that requirement. A very important and helpful feature of buying policy at younger age is low payable premium. Nonetheless, the older policyholders may like having a life insurance policy for supporting their surviving partner or as an inheritance for their children.

Irrespective of your age, the primary step while buying life insurance is to define your requirements. There are many websites providing guidance on the subject what type of life insurance do I need? or you may discuss it with your insurance agent. Though the most important factor is your yearly salary, many other factors come into play. You present expenses including rent, mortgage and tuition fees, if any, need to be factored in. The other factors coming into play are urgent expenses like medical bills or burial expenses and the funds you would need in case you decided to change your job.

Well, if your spouse is not working, you have to take into account the expenses likely to be incurred for getting a substitute for doing all the jobs in his or her absence. They may be doing cooking and other household jobs. One also needs to take into account the expense of having a stay at home parent. All these factors need consideration for deciding what type of life insurance do I need?

It’s not unusual for people to underestimate their requirements. A non-profit organization that educates people on insurance and financial planning adds that in the present market, consumers need to invest more capital to get the same amount of interest than what they were required to do couple of years ago.

As already said, life insurance products come in large range. Once you have assessed your requirements you can seek help of an insurance agent for getting an appropriate policy. However, you should know that term life insurance provides you cover for a chosen number of years, but a permanent life insurance remains valid as long as you keep paying premiums. Permanent life insurance is also known as cash value insurance as it also generates accumulated savings with tax deferred benefits. Whole life, universal life and variable life are all different types of permanent life insurance.

Understanding term insurance is quite simple. It’s akin to paying rent, so when you don’t pay rent, you lose coverage. That is one reason that young people buy such policies. But a thorough understanding of whole life insurance necessitates the need of an agent.

Here’s How to Become a Millionaire by Retirement?

Question:- How to become a millionaire by retirement?

Answer:- Many people often wonder what steps they should take enabling them to have $1 million at the time of retirement. That target of $1 million is often within the reach of many who start saving early in life, make wise and careful investments and don’t withdraw funds prematurely. Here’s how to become a millionaire by retirement.

Start saving early in your career: Though it may look tough to begin the process of saving soon after you get your first job as one is usually required to pay back student loans, this is the most effortless way to be a millionaire by your retirement. You should understand with each passing year, your capacity to save gets reduced due increased expenses. It’s not difficult to understand the benefits of starting savings early in life. On beginning to save nearly $4830 per year, starting at age 25, you’ll have $1 million by the time you are 65 years of age, considering a yearly return of seven percent after having paid fees. On the other hand, if you get started on reaching forty years, you’ll need to save nearly $15,240 /annum for the same age of retirement and the same rate of return. You may even start saving smaller amounts and augment your savings as you collect bonuses and salary raises. At age 20, you may be able to save just $100/month, but by the time you are in your early thirties the habit would have grown with you, prompting you to save double the amount, meaning $200. The process of saving is akin to building muscles. Starting early with small sums, allows you to build the saving muscle.

Choose investments with low expense: The fees you pay via your 401(k) plan reduce return on your investment. On contributing nearly $7,795 every year for 35 years to your 401(k) accounts you’ll have $1 million, with an assumed annual return of seven percent and an expense of 0.5%. If the fees were higher by one percent, meaning 1.5%, you’ll be required to save $9,690 for each year to be a millionaire after 35 years, meaning an extra yearly expense of $1,895. Moral of the story is that one needs to look for investment option having low expense. The less you pay towards fees, taxes and penalties, the more you’ll have to save and invest.

Get a match: On getting a 401(k) match, you’ll become richer at much faster rate than if you were on your own. Let’s say your employer contributes $1,500/year towards your 401(k). Making an annual additional contribution of $5,475 to the same account for 35 years allows you to be a millionaire. In the absence of any contribution from the employer, you would have made enhanced contribution of $$6,975/year. But you have to check the granting rights given by your employer. Unless you remain totally invested in that plan, you may not be able to retain contribution of employer in your retirement account. Some employers may demand you to be with them for 5-6 years before allowing you to retain their contributions in your retirement account.

Cover gaps in your retirement benefits: Saving for your retirement becomes a lot more difficult if you get laid off, change your jobs or take time off your job. On getting the next job, you may be required to wait for sometime before you could join 401(k) plan or get a 401(k) match. To fill in such gaps, you may be required to keep saving in an IRA or a taxable investment account till you are qualified for a new retirement plan at job. Try saving outside the job an amount equal to what your jobs allow you to save. Otherwise, you’ll need to save additional mounts in advance of retirement.

No premature withdrawals: Among the biggest obstructions when you want to become a millionaire by retirement is withdrawing funds from your 401(K) prior to retirement. On withdrawing funds from that account you are required to pay income tax on the amount withdrawn. On withdrawing before 59½ years, you have to face a penalty of ten percent. When you take out $10,000 from your 401(k) plan at 40 years and happen to be in 25% tax bracket, you’ll lose $3,500 by way of taxes and penalties. You’ll reach your target sooner if you don’t make any premature withdrawals and thus avoid penalties and taxes on your funds till retirement.  It’s best to avoid removing funds from your 401(k) on changing jobs by rolling cash to an IRA or 401(k) plan of new employer or just leaving it in your old 401(k). You’ll find it helpful to create an emergency fund other than your retirement account and use the same for any financial emergency.

Balance safety and growth: For an average investor, lacking experience, 401(k) portfolio can’t be expected to do better than the stock market every year. So, they should aim to achieve an average stock market growth.  Well, there are investors who manage to get up to twenty percent return, but that’s not everybody’s cup of tea. The logical way to getting average rate of return is to keep investing and stay invested for longer periods. You need to have a reasonably good investment strategy comprising of mix of bonds, stocks and cash as per your level of risk tolerance.

Enhance your savings after your children become independent: Increase your savings after your children’s education: Here’s the last but very practical way telling you how to become a millionaire by retirement. After your children have finished their education and become self-supporting, you’ll find that you can enhance your savings for retirement. Generally, people don’t have lots of money when children are at school. Sometime between your 50th-60th birthdays you’ll find that you have surplus cash for investing. Invest that money prudently and you’ll be closer to your target of being a millionaire by retirement.

How To Save For Retirement On A Small Salary?

Question:- How To Save For Retirement On A Small Salary?

Answer:- It’s understandable that paychecks, hardly sufficient to take care of regular expenses, make it very difficult to save for your retirement.  Yet there are ways and plans helping you to accumulate funds despite small income. Here are some tips on how to save for retirement on a small salary.

Look for a job offering superior benefits on retiring: Before you convey your formal acceptance to a job offer, check the total package on offer. Does it include retirement benefits? Jobs offering such benefits should be preferred. The reason is not difficult to guess. Here’s a simple example. Let’s assume you have two offers at hand from different companies, both paying the same salary of say, $40,000/annum, but only comes with a 401(k) match of up to 3% per annum. On accepting this job your factual earnings become $41,200/year. That helps your savings.

Take benefits of tax exemptions: You would know that even if you make small contributions to your IRA or 401(K) account, your payment towards income tax gets deferred, meaning you are not taxed annually for the amount deposited in these accounts. If you fall in the 15% tax bracket and saves $1,000 in an IRA or 401(k), you’ll save $150 on your next income tax bill. You can contribute to IRA even just before filing your tax return in the month of April, but 401(k) doesn’t offer this facility. This is an important, easy to follow trick when considering how to save for retirement on a small salary.

Get savers’ credit: Those with low to moderate income with contributions to IRA or 401(K) are also entitled for a retirement saver’s tax credit. For the year 2013, workers with salary below $29,500 for singles, $44,250 for heads of household and $59,000 for couples can further claim tax credit of up to $1,000 in case of individuals and double the amount for couples. Your credit rate depends on the amount of your contribution and the amount of salary you draw. You can claim savers’ credit of up to $2,000 towards contribution made to retirement account, with credit varying from 10-50% of the amount of contribution, the maximum credit goes to savers with minimum income. A couple that earns $30,000 and contributes $1,000 to an IRA is entitled to $500 credit.

Think about a Roth IRA: Here is another helpful tip for those wondering how to save for retirement on a small salary. If you happen to be in low tax bracket at present but hope to be falling under a higher bracket during the curse of your career or during retirement, you can benefit substantially by making contributions to Roth IRA or Roth 401(k). This allows you to pay your taxes in advance as per your present low salary. Moreover, no tax is payable on withdrawing funds during retirement, even if you were falling under higher tax bracket. Roth is naturally most helpful if you participate at an early age. You are also allowed to withdraw contributions made by you but not the earnings thereof. Moreover, you are not liable to pay any penalty or tax when needing cash for any emergency. It offers a win-win situation!

Keeping investment costs low: It’s imperative for investors not to pay more fees when choosing investment options than what’s absolutely essential. It’s therefore significant to look for and invest in low-cost index funds. In 2012, the average expense ratio for aggressively managed equity funds was 0.92%, while the same was 0.13% for indexed equity funds, as reported by the Investment Company Institute and Lipper data.

Automate saving for your retirement: The best course for augmenting your savings is to withhold money, you intend saving for retirement, from your paycheck straightway.  Then you are not prompted to spend elsewhere.  If your employer doesn’t extend means of doing so, you should arrange to transfer definite amount of money from your each paycheck to a savings or investment account. You can give instructions to your bank accordingly. Once you start it, you are most likely to continue with it. Even a small savings of say$10 every week gets accumulated to a substantial amount after a long time.

So, those were some of the important tips telling how to save for retirement on a small salary. You may choose to follow one or more of these practices to build substantial savings for your retirement despite your low salary.

When Can I Retire?

Question:-When Can I Retire?

Answer:- Though one may opt to retire at anytime, deciding when can I retire can be rather tricky! There are no set rules for retiring. You may even opt to retire as early as late thirties, provided you have prepared a plan to see you through the rest of your life. Timing plays the most significant role when deciding when can I retire. The other important factors helping making decision include pension accessibility and your financial requirements for maintaining your lifestyle during retirement. Here are certain considerations that shouldn’t escape your mind while planning for your retirement:

 

Social Security Pensions

At whatever age you may decide to quit working, please note that you are permitted to withdraw funds from your Social Security Administration only after you have reached the age of sixty years. Though the age for full retirement differs, depending on the year of your birth, people born later than 1960 cannot claim full benefits of retirement till they attain an age of 67 years. Though you can start getting pension even on reaching the age of 62, you’ll need to face a cut of thirty percent in your pension amount.  On delaying your retirement to 65 years of age, you are entitled to get nearly 86% of your complete pension amount.

IRAs and 401ks

Various retirement contributions that you may make in anticipation of withdrawing them on your retirement are not taxed. Though you can withdraw funds kept in any eligible retirement account at any time, on withdrawing funds from a customary IRA or a 401(k) plan before reaching an age of 59 1/2, you’ll be penalized to the extent of ten percent towards premature distribution tax, apart from income tax as applicable to all funds withdrawn prematurely. Moreover, you have to start getting distributions from such accounts on becoming 70 ½ years of age or pay excise taxes. Though IRA offers certain exemptions, like expenses towards education, first-home purchases and on  appealing against hardships, allowing  you to draw funds prematurely from your IRA without any penalty, but premature withdrawals from a 401(k) are liable to cost you despite your fulfilling the exception principles.

Calculating Retirement Needs

When considering when can I retire, you need to assess if the funds you have will be adequate to maintain your lifestyle with no other source of additional income, you can opt to retire at any age you like. Though experts recommend that on retiring you should have enough arrangements to give you nearly eighty percent of your present income, it all depends on your conditions and financial requirements. You can make an approximation of the percentage of your present income that you’ll require to live comfortably and use that as a base for calculating your annual financial requirements. On multiplying that amount with the estimated number of years you expect to live will give you the total amount of funds you should have at the time of retiring.

Early Retirement and Social Security

On retiring at your full age of retirement, you can expect to get nearly forty percent of yearly wages. If you opt to retire at the age of 62, you get nearly 28% of your wages. The Social Security Administration calculates pension amount as per the contributions made by you during your lifetime meaning that on stopping to work, at 45 years of age, your pension gets severely reduced because you would have made contributions for less number of years.

Accounting for Notes Receivable

Accounting for Notes Receivable

Companies are often required to offer credit to their buyers, promising to make payment and settle dues at a later date in future. Credit is offered in two ways, notes receivable and accounts receivable. The latter stands for buyers, assuring payment by due date that’s generally shortly after having bought the goods, whereas the former stands for customers who promise to clear their dues after a prolonged length of time. The notes receivable require a buyer to sign a formal document, known as promissory note wherein they promise to make payment, including interest, at a specified date as per the stated value of the note. There are definite ways for accounting for notes receivable.

Accounting for notes receivable

If a company concurs to allow promissory note to its buyer, it needs to take into account notes receivable in its books of accounts. Each promissory note specifies the sum of credit offered plus the rate of interest to be charged and the date by which it has to be paid. While accounting for notes receivable these are treated as an asset and continued as usual debit balance. On receiving payment against the note from its client, the company debits the account of notes receivable by the amount received and credits sales.

Accounting of payments received against notes receivable

As the buyer pays against the promissory note, the interest is also paid along with.  The interest due from the client is calculated by multiplying the amount stated in the note by the stated rate of interest for the time (number of days) the customer availed credit.

The company accounts for the funds collected by debiting cash for the total sum received and crediting the stated value of the promissory note and also the interest income by an amount equal to the earned interest.

Record Discounting Of Notes Receivable

At times the company may require funds before the customer has paid against the promissory note. The company may approach a financial institution like bank and get the note discounted. It simply means that the bank pays cash to the company against the right to collect proceeds against the note. Of course, the bank charges commission for rendering such services. The company computes the amount payable as commission by multiplying the maturity amount or stated value of promissory note with the rate of commission for the time that is still due for maturity of the note. The length of time for which interest is to be paid is calculated by dividing the number of days left for maturity of note by 365.

The company accounts for discounting of promissory note by debiting cash equaling the sum of cash received, it credits notes receivable by an amount equal to the stated value of promissory note and also credits the interest amount for the difference.

Accounting for notes receivable

The amount of time mentioned in the promissory note may vary from a couple of months to years. When the time is short of one year, it’s considered as a current asset. However, when the note falls due for payment beyond a year, it is shown as a non-current asset. All notes due for payment are shown as assets of the company. These assets are reported in the balance sheet of the company. Current notes are indicated as current assets and non-current notes are indicated in the non-current assets.

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How Does Factoring Work?


How Does Factoring Work?

Factoring Defined

For above four hundred years, businesses have been making use of factoring. Though it is often referred to as a loan, in fact it is not, as you’ll know on understanding how does factoring work.  Actually factoring refers to a business transaction that allows a business to sell its financial receivables to an intermediary, known as a “factor,” who pays the business directly, usually in the form of working capital, enabling the business to expand its activities. The business sells its financial receivables at certain discount.

How does factoring help businesses?

Businesses are encouraged to practice factoring as it enables them to get finance without any need to prove their credit worthiness that can be quite challenging, especially under tough economic circumstances. Factoring, needing no business plan or bank statements, is more convenient and quicker than availing a loan from any bank. In effect, factoring allows businesses to get rid of finance receivables that are most often a big source of irritation for a lot of business executives. On selling a product or a service, the businesses have to wait, at times for months, to get their bills paid. Added to that is the likely risk of the buyer not paying those bills.

Factoring allows the business to get money immediately. On handing over your receivables to a factor, you get paid in advance to the extent of seventy to ninety percent of the amount of receivables. The factor charges a nominal fee of two to three percent. The balances of funds are released by the factor on receiving full payment against receivables. That helps business to have improved cash flow, allowing it to make further investments, helping its growth.

Normally, the fee charged by the factor, also called discount, is proportionate to how old the receivable is. The older it is, the more is the fee. Majority of factors would not accept receivables that are more than ninety days old.

Now that we know how does factoring work, we can list its advantages. BusinessFinance.com lists the following reasons that prompt businesses to approach a factor:

It works as a means of additional working capital

It relives them from the responsibility of collecting funds from customers, especially from those who are not likely to pay in time.

  1. Businesses can book more orders.
  2. It works as a flexible funding system that increases with sales.
  3. It allows you to derive discount benefits from vendors.
  4. You can easily get finance for paying wages and taxes.
  5. You can offer credit to your bigger customers.
  6. It enables you to buy additional machinery or buildup your inventory.

Important drawbacks

The practice of factoring has drawbacks for both, the business and the factor itself.  The business owner needs to pay fee and other charges and it is not unusual that at times for these expenses to be more than the cost of availing bank loans. The factor is exposed to the risk of bad debt as a result of having got bad receivables or fraud by way of fake invoices.